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91 Cards in this Set
- Front
- Back
what are merchandising companies |
they buy and sell merchandise rather than perform services as their primary source of revenue |
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what are examples of merchandising companies |
REI, Wal-Mart and Amazon |
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what are the two types of Merchandising companies |
-retailers -wholesalers |
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what is a retailer merchdansier |
merchandising companies that purchase and sell directly to consumers |
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what is a wholesaler merchandiser |
merchandising companies that sell to retailers |
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what is the primary source of revenues for merchandising companies |
the sale of merchandise known as sales revenue or sales |
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what are merchandising companies two categories of expenses |
-cost of goods sold -operating expenses |
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cost of goods sold |
is the total cost of merchandise sold during the period |
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what is the cost of goods expense directly related to? |
the revenue recognized from the sale of goods |
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what two items are uniwue to a merchandising company; they are not used by a service company |
-cost of goods sold -gross profit |
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Is the operating cycle of a merchandising company usually longer than that of a service company? |
yes |
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what is the added asset account for a merchandising company |
inventory |
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what do companies report inventory as on a balance sheet |
a current asset |
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what is the operating cycle for a merchandising company? |
cash>buy inventory>inventory>sell inventory>accounts receivable>mail> receive cash>cash |
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what is the flow of costs for a merchandising company? |
beginning inventory plus the cost of goods purchased is the cost of goods available for sale. As goods are sold, they are assigned to cost of goods sold. those gods are not sold by the end of the accounting period represent ending inventory. |
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what are the two ways companies use for inventory? |
perpetual inventory system and periodic inventory system |
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perpetual inventory system |
companies keep detailed records of the cost of each inventory purchase and sale, these records continuously-perpetually- show inventory that should be on hand for every item. under perpetual inventory system, a company determines the cost of goods sold each time a sale occurs |
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what is an example of perpetual inventory ? |
a ford dealership has seperate inventory records for each automobile, trucks and van on its own lot and showroom floor. |
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periodic inventory system |
companies do not keep detailed inventory records of the goods on hand through out the period. instead they determine the cost of goods sold only at the end of the accounting period- that is periodically. at this point the company takes a physical inventory count to determine the cost of goods on hand |
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what are the three steps of the periodic inventory system to determine the cost of goods sold |
1.determine the cost of goods sold on hand at the beginning of the accounting period 2.add to it the cost of goods purchased 3.subtract the cost of goods on hand at the end of the accounting period |
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what types of companies use the perpetual system? |
companies that sell merchandise with high unit values such as automobiles, furniture, major home appliances |
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why is the perpetual system named so? |
because the accounting records continuously show the quantity and cost of the inventory that should be on hand at any time |
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does the perpetual or periodic system provided more control |
perpetual
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how do companies purchase inventory |
using cash or credit (on account) |
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when do companies usually record purchases |
when they receive the goods from the seller |
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how do companies record cash purchases ? |
by an increase in inventory and a decrease in cash |
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purchase invoice |
indicates the total purchase price and other relevant information |
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what should a purchase invoice do? |
it should support each credit purchase |
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what does the purchaser do since they do not prepare a separate purchase invoice? |
the purchaser uses a purchase invoice a copy of the sales invoice sent by the seller |
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what is the journal transaction if Sauk stero has made a purchase from PW audio supply |
the entry increases (debits) inventory and increases (credits) accounts payable |
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using the perpetual system would a company increase (debit) inventory for clothing, sporting goods, and anything else purchased for resale to costumers?
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yes yes yes |
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using the perpetual system what purchases are not debited to inventory? |
companies record purchases of assets acquired for use and not for resale such as supplies, equipment, and similar items as increases to specific asset accounts rather than to inventory |
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Freight terms are expressed as one of two things |
FOB shipping point or FOB destination |
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FOB means |
Free on board |
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FOB Shipping means |
that the seller places the goods free on board the carrier, and the buyer pays the freight costs |
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FOB destination means |
that the seller places the goods free on board to the buyers place of business, and the seller pays freight |
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what is the journal entry when the buyer incurs the transportation costs, these costs are considered part of the cost of purchasing inventory .... |
therefore the buyer debits (increases) the inventory account |
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what are freight costs incurred by the seller on outgoing merchandise? |
they are an operating expense to the seller 'these costs increase an expense account titled freight out or delivery expense' |
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purchase return |
the purchaser may return the goods to the seller for a cash refund if the purchase was made in cash or credit if the purchase was made with credit |
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what is an alternative to returning damaged merchandise |
an allowance or deduction if the seller is willing to give one known as a purchase allowance |
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purchase discount |
the credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment |
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how does a purchase discount benefit both buyer and seller |
the purchaser saves money and the seller is able to shorten the operating cycle by converting the accounts receivable into cash |
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credit terms |
specify the amount of the cash discount and time period in which it is offered. They also indicate the time period in which the purchaser is expected to pay the full invoice price |
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n/10 n/30 n/60 EOM |
this means, that the buyer must pay the net amount in 30 days, 60 day, or within the first 10 days of the next month |
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why when the buyer pays an invoice within the discount period, the amount of the discount decreases inventory? |
because companies record inventory at cost, and by paying within the discount period, the buyer has to reduce its cost. |
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what can passing up the discount be viewed as? |
paying interest |
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when do companies record sales revenue |
when the performance obligation is satisfied; the performance is satisfied when the goods transfer from the seller to the buyer |
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business document |
should support every sales transaction, to provide written evidence of the sale |
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cash register documents |
provide evidence of cash sales |
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sales invoice |
provides support for a credit sale; the orignal copy of the invoice goes to the costumer, and the seller keeps a copy for use in recording the sale. |
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what does a sales invoice show on it ? |
the date of the sale, customer name, total sales price, and other relevant information |
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what are the two entries that a seller makes for each sale? |
1. records the sale
2.records the cost of the sale |
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what is the journal entry for the first entry of a sale?
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the seller increases (debits) cash (or accounts receivable if a credit sale) and also increases (credits) sales revenue |
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what is the journal entry for the second entry of a sale? |
the seller increases (debits) cost of goods sold and also decreases (credits) inventory for the cost of those goods |
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sales returns and allowances |
these are transactions where the seller either accepts goods back from the buyer (a return) or grants a reduction in the purchase price (an allowance) so the buyer will keep the goods. |
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contra revenue account |
sales returns and allowances; this means that it is offset against a revenue account on the income statement |
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what is the normal balance of a sales returns and allowances |
a debit |
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why do companies use a contra account instead of debiting sales revenue? |
to dis-close in the accounts and in the income statement the amount of sales returns and allowances |
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what may excessive returns and allowances suggest? |
problems-inferior merchandise, ineffcienices in filling orders, errors in billing customers, or delivery |
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sales discount |
is based on the invoice price less returns and allowances. This is a cash discount offered by the seller. |
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what is the journal entry in a sellers books if a sales discount is offered |
the seller increases (debits) the sales discounts account for discounts that are taken under the amount of cash being received then crediting accounts receivable |
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is sales discounts a contra revenue account? |
yes |
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why does a merchandising company require one additional adjustment entry? |
because the companys unadjusted balance in inventory usually does not agree with the actual amount of inventory on hand |
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what is the journal entry if a company has an unadjusted balance of $40,500 in inventory. through a physcial count the company determines its actual merchandise inventory is 40,000 |
the company would debit 'cost of goods sold' by 500 and credit 'inventory' by 500. this is to adjust inventory to physical count |
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what does a merchandising company close? |
closes to income summary all accounts that affect net income |
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in journalizing what does the company do |
the company credits all temporary accounts with debit balances and debits all temporary accounts with credit balances |
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Sales transactions
-selling merchandise to customers |
debit: cash or accounts receivable Credit: Sales revenue |
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Sales Transactions -granting sales returns or allowances to customers |
debit: Sales returns and allowances credit: Cash or accounts receivable |
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Sales transactions -paying freight costs on sales; FOB destination |
debit: Freight-out credit: Cash |
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Sales Transactions -receiving payment from customers within discount period |
Debit:cash and sales discount Credit: accounts receivable |
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Purchase Transactions -Purchasing merchandise |
Debit: inventory Credit: cash or accounts payable |
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Purchase Transactions -paying freight costs on merchandise purchased; FOB shipping point |
Debit: inventory Credit: cash |
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Purchase Transactions -receiving purchase returns or allowances from suppliers |
debit: cash or accounts payable Credit: inventory |
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Purchase Transactions -paying suppliers within discount period |
debit: Accounts payable Credit: Inventory and cash |
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multiple -step income statement |
it shows several steps in determining net income. Two of these steps relate to the companys principal operating activites |
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what does a multiple step statement distinguish between? |
Operating and Non operating activities |
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where does the multiple step income statement begin? |
sales revenue |
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on a multiple step income statement what is the step after the sales revenue |
to deduct contra revenue accounts; sales revenue and allowances and sales discounts. After deducting this you will arrive at net sales |
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Gross profit |
companies deduct cost of goods sold from sales revenue |
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Gross profit rate |
divide the amount of gross profit by net sales |
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what is more useful the gross profit rate or the gross profit amount? |
rate |
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merchandising profit |
gross profit represents this and it is not a measure of the overall profitability because operating expenses are not yet deducted |
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operating expenses |
are the next component in measuring net income. they are expenses incurred in the process of earning sales revenue. |
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how does a company determine net income |
by subtracting operating expenses from gross profit. |
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non-operating activities |
consist of various revenues and expenses and gains and losses that are unrelated to the company's main line of operations. |
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income operations |
when non-operating items are included this is the label. the amount is determined by subtracting cost of goods sold and operating expenses from net sales |
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what categories are the results of non-operating activities shown in |
-other revenues and gains -other expenses and losses |
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what are four examples of other revenues and gains |
-interest revenue -dividend revenue -rent revenue -gain |
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what are examples of other expenses and losses |
-interest expense -casualty losses -loss |
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single step income statement |
only one step- subtracting total expenses from total revenues is required in determining net income
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what do merchandising companies report inventory as ? |
current asset |